Date: 09 October 2024
Broker: UOB Kay Hian
Company Overview
Hong Kong Exchanges and Clearing Limited (HKEX) owns and operates the stock exchange, futures exchange, and their related clearing houses in Hong Kong. It is a critical player in Hong Kong’s financial infrastructure and plays a significant role in connecting global markets with China. As of the report’s date, the company’s stock trades at HK$340.80, with a target price set at HK$355.00.
Stock Data
- Bloomberg Ticker: 388 HK
- GICS Sector: Financials
- Market Cap (HK$m): 432,078.8
- Market Cap (US$m): 55,593.6
- Shares Issued (m): 1,267.8
- 3-Month Average Daily Turnover (US$m): 350.0
- 52-Week High/Low: HK$397.80 / HK$207.84
- Major Shareholders: The Government of Hong Kong SAR holds 5.8%.
Price Performance
Over the last 12 months, HKEX stock has shown robust performance:
- 1 Month: +48.2%
- 3 Months: +42.1%
- 6 Months: +50.5%
- 1 Year: +18.1%
- Year-to-Date: +27.2%
Recent Market Activity and Turnover
Due to China’s recent stimulus measures and monetary policy easing by the People’s Bank of China (PBOC), HKEX experienced a surge in average daily turnover (ADT). The company hit a historical high turnover of HK$505.9 billion on 30 September 2024, following the announcement of monetary policy changes. After the reopening of the A-share market, another milestone was achieved, with a turnover of HK$620.4 billion.
By the end of Q3 2024, HKEX’s 20-day moving average ADT rose to HK$238.2 billion, compared to the year-to-date ADT of HK$120.4 billion. The Stock Connect program saw significant growth, with a 29% year-over-year increase in Northbound ADT and a 113% increase in Southbound ADT.
Earnings Forecast and Q3 2024 Results Outlook
HKEX is expected to report its Q3 2024 results on 23 October 2024. The company is forecast to show a core revenue growth of 9.3% in Q3, primarily driven by record ADT figures. The quarter’s ADT reached HK$118.8 billion, representing a 20.7% year-over-year growth.
However, despite these positive figures, the growth rates in revenue and net profit were slower, at 6.8% and 6.0%, respectively. The lower growth rates are attributed to declining net investment income (NII) and a higher effective tax rate. Additionally, the derivatives and commodities markets experienced strong performance, with average daily volumes growing by 10.5% and 17.3%, respectively.
Impact of Lower Fed Rates on Market and IPO Activity
A lower Federal Reserve interest rate environment is expected to benefit HKEX. Historical data suggests that stock market turnover and velocity in Hong Kong rise during interest rate cuts. The company has witnessed 45 IPOs year-to-date, raising HK$55.6 billion in 2024, with the standout being the HK$35.7 billion IPO of Chinese home appliance maker Midea. The low-rate environment is likely to support a robust IPO pipeline of over 100 applicants, ensuring continued growth into 2025.
Valuation and Price Outlook
Although HKEX’s share price has surged 35% over the past two weeks, mainly due to the PBOC policy easing, the current valuation is considered rich. HKEX’s valuation has jumped from a year-to-date low of 21x 2025F price-to-earnings (PE) ratio to 32x, which is 1.2 standard deviations (SD) above its long-term mean of 27.0x. Further, the premium valuation of HKEX relative to the Hang Seng Index (HSI) has risen to 2.3x, surpassing its historical average of 2.0x.
Despite these strong share price performances, the sustainability of such high ADT levels is uncertain, and geopolitical risks, such as the upcoming US election, could contribute to a normalization of ADT to around HK$150 billion in Q4 2024.
Earnings Revisions and Risks
UOB Kay Hian has revised upwards HKEX’s earnings for 2024-2026 by 6.4%, 8.6%, and 6.0%, respectively. These revisions are driven by increased ADT forecasts for the corresponding years, thanks to positive market sentiment and the Fed’s easing cycle.
Financial Forecasts
- 2024F Net Profit: HK$12,801 million
- 2025F Net Profit: HK$13,610 million
- 2026F Net Profit: HK$13,807 million
- 2024F EPS: 1,009.7 HK$ cents
- 2025F EPS: 1,073.5 HK$ cents
- 2026F EPS: 1,089.1 HK$ cents
- 2024F PE: 33.8x
- 2025F PE: 31.7x
- 2026F PE: 31.3x
Dividend Yield Forecasts
- 2023 Dividend Yield: 3.7%
- 2024 Dividend Yield: 4.0%
- 2025 Dividend Yield: 4.2%
- 2026 Dividend Yield: 4.3%
Conclusion
While HKEX’s recent performance has been driven by extraordinary ADT increases and a favorable interest rate environment, UOB Kay Hian remains cautious about the sustainability of these trends. Given the rich valuation and potential headwinds in net investment income, the broker has downgraded the stock to “Hold” with a target price of HK$355.00. Further share price appreciation will require a more consistent uptick in ADT to support underlying earnings growth.
